Financial 'Supermarket' Idea Re-Emerges, in Humbler Form

When bankers first started pushing for the concept of the financial supermarket 30 years ago, they lacked the regulatory permission and the technological know-how to succeed.

Today, they have the regulatory concessions — to the dismay of some critics, to be sure — and the technology has come far enough so that banks interested in getting a full picture of their client relationships across product lines can finally do so. Yet the promise of the financial supermarket has gone largely unfulfilled.

It may have a second chance, albeit in less ambitious form. With the quest for new sources of earnings getting all the more urgent, banks are still looking for ways to squeeze more business out of every customer they can. After all, important revenue generators in the credit card business and from overdraft fees are getting legislated away.

"There definitely is a renewed interest in the idea and a recognition of a strategic need" to get more out of every relationship, said retail banking consultant Bob Hedges, managing partner at Mercatus LLC. "Banks are saying, 'Well, in the past we talked about this a lot, and now we've got to figure out how to do it.' "

The formula for success has eluded subscribers to the supermarket philosophy since the beginning. The challenge intensified as retail customers found an easy way to manage at multiple firms with a few simple clicks of a mouse button. They also developed a deepening mistrust of the banking industry as a result of the financial crisis, while corporate customers became acutely aware of counterparty risks and the dangers of concentrating too much exposure to any one institution.

As a result, the supermarket construct seems as distant as ever. But an ultranarrow model generally doesn't work either, as stand-alone investment banks and mortgage providers learned in 2008.

Instead, a new model has emerged for banks. It still requires cross-selling skills and a more holistic treatment of customers, but it doesn't call for the awkward fusing of disparate interests in commercial banking, investment banking, insurance, asset management, financial planning and other money-centered businesses that typically demand some degree of scale to thrive.

The new model is really more akin to that of the minimart, the supermarket's humble cousin, known for having convenient access points and edited-down selections of staples with mass appeal.

"The traditional universal bank concept had been uber-extended into businesses that [banks] didn't need to be in," said Terry Moore, managing director of the North America banking practice at the consulting firm Accenture. "Now they've gotten more focused on a core set of businesses that provide the advantage of diversity but don't cause them to get too far out there."

Witness the dismantling of Citigroup Inc., which more than any other company came to symbolize the ambitions and failures of the supermarket evangelists. It merged its Smith Barney brokerage last year into a joint venture majority owned by Morgan Stanley & Co. In April the company spun off Primerica Inc., raising $320 million in a public offering of the insurance business.

It is worth noting that Citi started adjusting its model long before the company fell into crisis mode. It spun off Travelers Property and Casualty in 2002, and sold Travelers Life and Annuity three years later, as strong a signal as any that the company created by the merger of Travelers Group and Citicorp was struggling to justify its breadth.

Even at the beginning of what was supposed to become the age of the supermarket, the appropriate scope of financial institutions as envisioned by customers never seemed as expansive as what industry executives had in mind.

In the mid-1980s, when Merrill Lynch & Co. sold a real estate unit that included a mortgage business and a relocation services division, then-Chairman William Schreyer acknowledged that the firm "can't be all things to all people." American Express Co. also went through a series of makeovers as it, too, struggled to find the formula for a successful financial supermarket.

Banks have been trying to master the art of the cross-sell ever since. But the scope of those efforts is no longer so wide.

At an industry conference in May, U.S. Bancorp Chairman and Chief Executive Richard K. Davis explained his lack of interest in expanding into investment banking and insurance, saying those businesses were "not in lockstep" with the Minneapolis company's culture. "Nor do we have any customers I can think of in the past couple of years who said they would choose not to bank with us because of our lack of an insurance business or our lack of an investment bank," he added.

The company has been aggressively advertising its growing corporate bank, and it recently opened a municipal securities desk that will underwrite and trade municipal debt. But U.S. Bancorp sees both of those efforts as a natural outgrowth of the very traditional banking relationships it has with commercial customers and local governments, and as a strategy for deepening those relationships.

Technology, a major stumbling block in the past, has been catching up with banks' needs. But given the likely disruption associated with a wholesale scrapping of existing architecture, and the steep cost of creating a more customer-centric infrastructure from scratch, most banks have limited their cross-selling technology investments to systems that fit on top of their legacy infrastructure, said Steve Berez, a partner in Bain & Co.'s IT and financial services practices.

Some banks are creating data warehouses with analytics that can "tag" customers based on the status of their relationship with the company, letting different silos of a bank know how to treat customers appropriately, Berez said. Other banks have opted for small programs that can be called up and referred to by individual product line systems, again so that employees in each silo can see a broader set of information about a given customer.

But technology is only one of the tricks that banks need to make their business structures, which are divided very much along product lines, flexible enough to work with customers on a holistic basis, Berez said.

Banks need to make sure that their staff on the front lines has access to whatever information can be gleaned from the data, so that they know the proper products or services or special offers to pitch. Banks also need to offer the right incentives to employees, so that the person handling the opening of a checking account sees the value of referring the customer to the loan officer down the hall.

"The idea that with a given customer they're going to understand the full range of products that the customer has — deposit accounts, mortgages, unsecured lending, credit card — and be able to service the customer in a unified way, that's something that most banks still aspire to do," Berez said.

The next step after getting that 360-degree view of customers is figuring out how to deepen the relationship. Often that means giving them an incentive on price.

"The hottest topic we're hearing now from banks is around the topic of relationship pricing," said Sherief Meleis, a managing director at the consulting firm Novantas LLC. "Part of the way banks are going to win on this is to the extent that they can price on a relationship level. It can't be a supermarket where you buy a bunch of things and there's no value for the integration."

Industry consultants say the best case studies for successful cross-selling and holistic customer service are outside the U.S., but some domestic banks are making inroads, too.

Wells Fargo & Co. sells an average of six products to each of its customers, and it has been applying its cross-selling prowess to customers of the old Wachovia Corp. The average number of products held by those customers is 4.85 and growing at a 9% annualized rate, company executives announced in May.

Of course, as banks broaden their relationship with customers, they're taking business away from other providers. The collapse of the shadow banking market created plenty of slack for traditional banks to pick up, but eventually the competition will become more of a zero-sum game for banks.

Meanwhile, even banks that have settled for a pared-down, minimarket model will have to constantly evaluate whether they can justify the array of business lines they have.

"The risk management requirements that are going to be imposed now are going to require people to really ask hard questions," said Scott Marcello, a partner in the financial services group at the consulting firm KPMG. "For example, I might have always felt I had to offer all the services to be a full-service investment bank, but am I getting the overall return I have to have, and do I need the full product suite? Do I need to have an insurance unit? How profitable is [each business]? Do I have the capability to manage it effectively?"

The answers to those kinds of questions could lead the industry even farther away from the original supermarket concept. But it's just as well, said Khosrow Dehnad, an adjunct professor of operations research at Columbia University who has written on the subject of financial supermarkets. Dehnad points out that real supermarkets — the ones that sell food — have few parallels to the banking business to serve as a good model. After all, when was the last time you were in line at the grocery store and worried about what would happen if the store went out of business? And would you be any less inclined to buy a box of cereal from a supermarket just because you also bought a bottle of medicine there that got recalled by the manufacturer?

Banks have a unique set of counterparty and reputational risks to think about, Dehnad said. They also have few opportunities to grab customers with impulse items, and limited flexibility to rearrange the "shelves" to present their products with maximum effect. And besides, the profit margins in the supermarket business are lousy.

"My impression is that most of the people who promoted [the supermarket concept] were the marketing people," said Dehnad, a former Citigroup structured products executive now with the Saudi Arabian banking company Samba Financial Group. "They'd say, 'We'll be the lowest-cost producer and grab the market.' But they really didn't drill down into what is possible."